The Democrats And The Deficit – OpEd

Jon Ossoff, the great Democratic hope to nab a longstanding Republican House seat in Georgia, turns out to be a budget hawk focused on reducing the deficit. This is a big problem for those wanting to see progressive Democrats retake control of Congress and, eventually, the White House.

There are two reasons why the obsession over the deficit obstructs progressive policy. The first is the obvious one—it restrains spending on important programs. The biggest example is the one constantly in the news these days: Obamacare.

President Obama seized on the idea that total spending on the Affordable Care Act over the 10-year budget horizon should not exceed $1 trillion—for no other reason than the fact that this arbitrary number sounded big and scary. This meant that the subsidies for people in the exchanges were not as generous as they should have been. As a result, middle-income people faced higher premiums and higher deductibles than would have been the case if Obama had been willing to raise the cost of the program modestly.

This gave millions of people very legitimate grounds for being unhappy with Obamacare. Perhaps there is some scorekeeper in the sky who gave President Obama high marks for his spending restraint, but it bought him absolutely zero in terms of support from Republicans. As it was, Obama’s inexplicable stinginess made the ACA a less effective program and a bigger political target than would otherwise have been the case.

In a context where opposition to higher taxes can be assumed, a commitment to balanced budgets, or something close to it, will by definition limit the sums available for social spending. This means less money for child care, education, health care, infrastructure, and everything else that we think it is important for government to be supporting.

But there is a second, even more important, reason why the fixation on deficits is counterproductive. Large budget deficits are often needed to raise employment.

While this is not always true—the United States had high levels of employment in the 1960s with relatively low budget deficits and at the end of the 1990s with budget surpluses—there are times when we need the extra demand created by a budget deficit to keep the economy near full employment. This is especially true in the period since the Great Recession lasting from December 2007 to June 2009.

The basic story of the Great Recession was that demand in the years prior to the collapse was driven by a massive housing bubble. Residential construction hit new records as a share of gross domestic project (GDP), the key measure of all goods and services produced nationwide. Soaring house prices created trillions of dollars of ephemeral housing wealth. This wealth led to a consumption boom as homeowners spent against their newly created home equity.

Both effects went sharply into reverse after the bubble burst. The overbuilding of the bubble years led construction to fall to the lowest share of GDP on record. Similarly, consumption fell back sharply when the housing wealth that had been driving the boom disappeared.

The shortfall in demand created by this drop in spending was more than 6 percent of GDP, which would be more than $1.2 trillion annually in the 2017 economy. Obama’s stimulus helped to counter this shortfall, but it was far too small and didn’t last long enough. At its peak in 2009 and 2010, it was roughly 2 percent of GDP. The initial stimulus largely ended in 2010, and the deficit hawks insisted on a sharp reduction in the deficit in subsequent years.

The result was an extraordinarily weak recovery. Millions of people were denied the opportunity to work altogether. Millions more could only find part-time work when they needed full-time jobs to support themselves and their families. Even today, we are arguably still well below full employment. The percentage of “prime age workers” (ages 25 to 54) who have jobs is still almost two percentage points below the pre-recession level and four percentage points below the peaks reached in 2000, according to data from the Bureau of Labor Statistics.

The losses from unnecessary unemployment are not borne evenly. The unemployment rate for African Americans tends to be twice as high as the unemployment rate for white people, with the unemployment rate for Black teens being far higher than the unemployment rate for white ones. And higher unemployment also affects the bargaining power of disadvantaged workers. The only time workers at the middle and bottom of the wage distribution have seen sustained real wage growth in the last four decades was the period of low unemployment in the late 1990s.

In short, maintaining a higher-than-necessary unemployment rate is subjecting disadvantaged groups to needless unemployment and underemployment. It is also reducing their wages. There are all sorts of things that we would like the government to do to help those at the bottom, but the first thing on our list should be to keep the government from harming them, as it does when we have an excessive focus on deficit reduction.

Flipping this over, the standard cry of the deficit hawks is that we are imposing an enormous burden on our children with the national debt. This is so far off the mark that it is hard to believe any policy person can say it honestly.

First, in terms of cost to our children, the needless austerity of the last decade has imposed an enormous and lasting burden on our children. If we compare today’s economy to the pre-crisis projections, current GDP is down by more than 10 percent. This comes to $2 trillion a year in lost output, more than $6,000 for every person in the country.

This is what the economy lost because we didn’t make investments in infrastructure and the private capital stock, education and training, and other types of spending that could have kept us closer to our pre-recession growth path. It makes no difference in people’s living standards whether they lose $6,000 because we tax it away or because they don’t earn it in the first place due to a weaker economy. Call this $6,000 per person per year the austerity tax imposed by the deficit hawks.

Let’s turn to the massive burden imposed by the $19 trillion debt. Currently the burden of servicing the debt—annual interest payments minus the money refunded from the Federal Reserve Board—is less than 1 percent of GDP, at roughly $180 billion for 2017. This compares with almost 3 percent of GDP during the 1990s. The burden will increase if interest rates go sharply higher and the Fed sells off its assets, but why would we expect these events to occur? For now, and likely for the indefinite future, the burden of servicing the debt will be far less than it was in previous decades.

One way in which the government pays for things, in this case research on developing new drugs, is by issuing patent monopolies, by which companies control access to essential drugs and also set their prices. If patent monopolies raise the amount we spend on drugs each year by $350 billion, it has the same effect on living standards as if the government imposed a tax of $350 billion on drugs. The difference is that we are giving private companies the authority to impose this tax. And the $350 billion is just for one industry. It is much larger if we add in medical equipment, software, and all the other sectors where these monopolies substantially increase the price of the protected items.

Yet, the deficit hawks never say a word about the burden imposed by government-granted patent and copyright monopolies. This indicates a real lack of seriousness on their part, at least from the standpoint of protecting our children’s well-being.

The most basic and accurate story we can tell about the deficit and our children is that we hand a whole society down to future generations. They will have the physical and technological capital we hand down to them, as well as whatever societal ills we hand down rather than address. They will also inherit the natural environment, with whatever damage we have done or prevented.

This is what we must think about when we talk about generational burdens. The size of the national debt really doesn’t enter the picture. Democrats should be talking about the type of society that we will be giving to our kids, not shaving a few dollars off the interest payments on the debt.